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Welcome to the strange financial world of Newcastle United



Newcastle United  financial review

By Phil Gregory

This continues our series of articles about the finances of EPL clubs.  There’s a full index of the articles in this series so far, by clicking here.

Matchday income

Credit to Newcastle for having a transparent set of accounts, but the finances themselves totally baffle me.

Matchday revenues decline over the period from 04-05 to the most recent set of accounts  08-09. This is thanks to  falling attendances despite season ticket prices remaining unchanged over the period. Most football clubs regularly increase matchday revenues as fans rarely stop coming to matches due to gradual ticket price rises. Most sides get away with above-inflation price rises each year without adversely affecting attendances significantly. Clearly, if prices go up by lets say 5% and the fall in attendances is negligible, then matchday revenues will go up each year.

While keeping season ticket prices constant is laudable, falling matchday revenues is a very worrying thing for the club as it is normally considered an area of steady income for a club.

Commercial revenue

Commercial revenue doesn’t show the same constant growth as most other sides either. The sponsorship agreement with Northern Rock, a deal over a number of years with payments made by the bank each season, was paid wholly up-front to fund the purchase of Michael Owen. I don’t think I can even describe this as front-loading the commercial agreement (I touched upon this in my Arsenal financial review,  if you’re unsure of what I mean by that, have a look there).

Such a move would reduce the total amount coming into the club in favour of an up-front lump sum, which was then blown on a marquee signing. Mike Ashley isn’t likely to continue with this policy, given how he’s pushing for prudence in the transfer market, though the fact that Newcastle are sponsored by the now state-owned Northern Rock has had an impact:  £5million a year sponsorship has halved upon renewal.

Upon his takeover, Ashley inherited a mortgage on the stadium: meaning they didn’t actually fully own their own stadium, and had a further cost of £4.5million a year in mortgage payments. Once the club changed hands however, the mortgage providers got cold feet and demanded the remaining 8-9 years of payments in a single payment that Ashley had to cough up for. This was the first in a series of bills that landed at Ashley’s feet that he had to cover to keep the club afloat.

Dividends for the Board

Unlike Arsenal, who’s board disregarded their rights to dividend payments in order to pay down the loan as quickly as possible, the Newcastle United board took around £35million out of the club between 1999 and the Ashley takeover. Had these funds been directed towards paying off the mortgage, the debt could have been paid off in half the 17 year timeframe. Such a move would also have reduced the interest bill in the period, thus saving the cash further funds. But then that would have been sensible, wouldn’t it!

TV money

Despite the new TV deal boosting revenues in the middle of the period,  declining league finishes have meant that Newcastle’s TV money hasn’t grown as much over the period as would be expected.   This was because a lower league position only warrants a smaller percentage of the money over the period, but if the deal itself increases (as it did), Newcastle’s TV money will still increase.

At the time of their relegation, Premier League TV money contributed  43.7% of Newcastle’s earnings, little of which would have been replaced by the Football League television deal upon relegation though parachute payments of £11.2million cover about a third of the loss of the difference.

Operating Losses

All this adds up to turnover declining compared to its 04-05 figure, after a drop of around 15% between 07-08 and 08-09. Operating losses of £9m, £11m, £24m and £25m from 04-05 to 07-08 point to fundamental concerns at the heart of the NUFC business model.  Ashley has had to dip into his own pocket on numerous occasions to pay off creditors to avoid administration proceedings and such a situation cannot go on forever.

Wage growth and amortisation

Naturally,with a backdrop of shaky revenues we of course have massive wage growth. Wages managed to grow by over 40% over the period 04-05 to 08-09, with the club relegated with a wage bill of £71million, one of the highest in the Premier League. That is only bested by high and increasing amortisation: a result of significant transfer spending (which will surprise nobody) and the most recent amortisation figure of just under £20million is higher than most sides, though lower than the top four average and the big spenders such as City and Spurs.

As of their last season in the Premier League, their wage bill was 82.6% of turnover. The fire-sale  of players during the summer that followed relegation (that left them with a matchday squad of about fifteen players who made regular appearances) makes total sense now, as does recent talk about very, very high wage restraint during this summer’s transfer dealings.

I’m very curious to see their accounts for 09-10: their wage bill won’t be low by any means and will dwarf the rest of the Championship.  For a club of that size they simply have too many underachieving players happily earning in the £30,000-£50,000 a week bracket.

Comparing their wage bill to points gained, they were spending nearly £2.1million per point gained the season they went down, underlining both how much they were spending on wages and their meagre points tally.

This figures looks much worse when we consider it is usually the teams at the bottom end of the table who have the lowest spends to points gained (Newcastle manage to have the league’s 2nd highest in 07-08 despite mediocre league performances).

Lower-table sides usually do well on this measure because player quality increases steadily while cost increases exponentially, so every league point earned is more expensive than the last. Occasionally there is the odd strange result, but it is mainly because the side pick up next to no points (think Derby County a few years back) rather than a high wage spend yielding next to nothing.

Conclusions

From what I’ve said, I think it’s fair to say that all of Newcastle’s problems have been as a result of rank mismanagement and little else. A recent under-performance in commercial revenues comes as a result of a desire for up-front payments limiting the total amount received, while a “chop and change” approach to management has led to wasteful transfer and wage spending, further reducing funds available to whoever happens to be the manager at that moment.

A short-term approach has led to supporter disenchantment, and attendances have fallen despite constant season ticket prices (which fall year-on-year if you consider the effect of inflation). This has snowballed dramatically, and what they’ve ended up with is the team’s relegation.

The club owner has belatedly sought to run the club correctly, but he is unpopular with fans. While he has made mistakes (one of which was called Dennis Wise) his ownership  has been an improvement on Freddy Shepherd’s.

The average fan may disagree, likely appeased by the semi-regular big name signings unveiled by Shepherd and now done away with by Ashley, but it was the previous owner who set the club on this path to the Championship.

Perhaps Ashley accentuated the fall with his blunders in 08-09, but at least he’s taken stock of events and the club is on the path to sustainability.

Ashley’s making all the right noises about youth development, giving local lads a chance and generally doing away with the overpaid mercenaries that have populated their dressing room in recent years. But talk costs nothing, and Newcastle are familiar with false dawns so a degree of  apprehension would be wise.

The return to the EPL

I actually had a chat with a Geordie friend about Ashley’s declaration that funds to prepare for their return to the Premier League would be limited. Unsurprisingly, he was absolutely livid, saying they’d be straight back down unless they strengthened, which is probably a fair point. They did well in the Championship, getting away with a small squad, but they won’t have the quality advantage in the first eleven over most sides like they had in 09-10, and as Aston Villa will testify, the intensity of the Premier League warrants a certain minimum number of bodies in the squad.

I however disagreed with his central assumption that spending will keep you up: you can spend plenty and still get relegated. Back down in the Championship and worse off financially than ever, the club would be simply gambling with their future all over again. Who could they bring in anyway? More mercenaries?

My view on what Ashley is doing is similar to that of the austerity programs of many world governments at the moment. He’s looking to cut back on costs everywhere with an emphasis on wasteful spending (big earners who are nothing special like Coloccini will likely be shown the door if they can find a buyer)  as well as looking to boost revenues where possible. Attempts may be made to strengthen the squad, but it will hopefully be done sustainably and with an eye on sell-on values. Blood some good youth prospects and get in some players in the 21-24 bracket, capable of playing in the Premier League who would have some resale value and above all do it on sensible wages.

Such a policy would likely send them down again this year, but they’d go down as a stronger side than they came up (both on the field and balance sheet) and they’d be strong favourites to come straight back up again. God forbid, they could even do it with an operating profit which would allow them that elusive thing that is spending on their squad within their means and give them a good chance of staying up.

Such measures would hopefully bring the crowds back up to what they used to be, with a side of players who want to play for the club that Geordies could be proud of. With an improving academy and some stability in the dugout, I’d back them to be capable of establishing themselves sustainably in the top half, and Ashley would be potentially able to start taking a little money (maybe £10m/£15m) out of the club a year to start to repay the loans that he has given the club to keep it out of administration.

Only at this stage of management, when the owner once again has credibility in the eyes of the fans and the club is both profitable and a  competitive Premier League could he justifiably begin to recover his substantial losses.

A lot of that requires keeping a cool head in the face of fan pressure this summer and to hope they take a long-term view. Neither of these things are characteristics associated with Newcastle FC, but for their sake, I hope they do go the course.

Footnote.   Thanks to Ian from Football-finances.org.uk for supplying some fantastic information for the article, things I wouldn’t have found out in the course of my normal research. Anyone interested in football finance should certainly take a look at his website

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Untold Arsenal: making sense of reality. Well, sometimes.

Making the Arsenal: by-passing reality. Who needs it anyway?

6 comments to Welcome to the strange financial world of Newcastle United

  • Rhys Jaggar

    Clearly the template should be something like Stoke, who managed to stay up the first season playing not particularly prettily but without going haywire in the market either?

    Target 14/15th, happy with 17th, if you go down, so be it.

    If they stay up, then they can start to consolidate and kick on…….

  • AaronGSi

    You would have to bank on them finishing above both Blackpool and WBA next season, so that just leaves them depending on a team like Stoke (my prayers are already in) or Wigan or Wolves having a really bad season too. So I would expect they are going into the new season fairly optimistic that they can stay there.
    I like Newcastle, and the Geordies are a great bunch, and the Premier league is better for having them in it. I’l be hoping they can do it next season and build from there

  • Phil

    That’s the plan Rhys, and boy do they need that Premier League TV money.

    I’m not so sure about WBA, though they should be above Blackpool. It’s a tough season to expect to stay up – normally there are a couple of current PL teams like Hull and Pompey that are clearly on the way down, this year I don’t really see a stand-out candidate for the drop.

  • Hartwick89

    Phil,

    Of all financial and economic pieces done thus far I believe this is the best in the context of Arsenal contrast. It really speaks to the pitfalls of a once Immense club who have fallen to the venom of mercenaries and wages and the populist approach to running a football club. It answers all the questions I have had of how not to run a once big club and the true way to run it responsibly. It begs the question of success. Meaning the facts state how this club has failed mostly on bad economic decisions. And, glaring to me is the lack of mention of the coaching. This as I see it is double edged. Either, the lack of good economic decisions and bad coaching is the reason for downfall or if bad economics with a good football approach reasons that economics always outweighs football coaching? Much to contemplate over this luscious piece. Would be interesting to hear from a coaches point of view…….

  • Phil

    Thanks for the compliments, Hartwick. I didn’t intentionally write it with Arsenal in mind, but yes there contrasts are there on every major issue. What’s strange is before the millenium they ran the club well :S

  • Hartwick89

    Kudos, to you for single focus and drive. Must be a real journalist then. Not seen a lot of thems lately lots of opinion nots alots ofacts and mostly opinions…….